NCERT Solutions for Class 10 Social Science (Understanding Economic Development) Chapter 3: Money and Credit (NCERT 2026–27)
These Class 10 Economics Chapter 3 solutions cover Money and Credit from Understanding Economic Development, the NCERT textbook for the 2026–27 session. The chapter explains why money is used as a medium of exchange, how it removes the problem of double coincidence of wants, the modern forms of money (currency and demand deposits), how banks use deposits to give loans, the terms of credit, the difference between formal and informal sources of credit, and how Self-Help Groups help the poor borrow at reasonable rates. Below you will find every end-of-chapter Exercise question reproduced verbatim and answered step by step, along with key terms, extra practice, MCQs, Assertion–Reason questions and FAQs.
Class: 10Subject: Social Science (Economics)Book: Understanding Economic DevelopmentChapter: 3Chapter Name: Money and CreditSession: 2026–27
Chapter 3, Money and Credit, begins by showing how money acts as a medium of exchange, eliminating the need for a double coincidence of wants that a barter system demands. It explains the modern forms of money — currency (notes and coins authorised by the government, issued by the Reserve Bank of India) and demand deposits with banks, which can be withdrawn on demand and used to make payments by cheque. Banks keep only a small share of deposits as cash and use the rest to extend loans, mediating between depositors and borrowers and earning from the difference in interest rates. The chapter then explores two credit situations (Salim’s profitable festival-season loan and Swapna’s debt-trap), the terms of credit (interest rate, collateral, documentation and mode of repayment), and the variety of credit arrangements in a village. Finally it contrasts formal sources (banks and cooperatives, supervised by the RBI) with informal sources (moneylenders, traders, employers), and presents Self-Help Groups and the Grameen Bank of Bangladesh as ways to bring affordable credit to the poor.
Key Concepts & Terms
Medium of exchange: money is called a medium of exchange because it acts as an intermediate step in the exchange process — a person sells goods for money and then uses that money to buy what they need.
Double coincidence of wants: in a barter system, what one person wishes to sell must be exactly what the other wishes to buy. Money removes the need for this double coincidence.
Currency: modern paper notes and coins. In India the Reserve Bank of India issues currency notes on behalf of the central government, and no individual can legally refuse a payment made in rupees.
Demand deposits: money deposited in bank accounts that can be withdrawn on demand. They earn interest and can be used to make payments by cheque, so they are accepted widely and counted as money.
Cheque: a paper instructing the bank to pay a specific amount from the payer’s account to the person in whose name the cheque is issued.
Credit (loan): an agreement in which the lender supplies the borrower with money, goods or services in return for a promise of future payment.
Terms of credit: the interest rate, collateral, documentation requirement and mode of repayment together make up the terms of credit; they vary from one arrangement to another.
Collateral: an asset (land, building, vehicle, livestock, bank deposits) that the borrower owns and uses as a guarantee until the loan is repaid; if the borrower fails to repay, the lender can sell it.
Debt-trap: a situation in which credit, instead of raising income, pushes the borrower into having to borrow again and again, leaving them worse off — as happened to Swapna.
Formal sources of credit: loans from banks and cooperatives, whose lending is supervised by the Reserve Bank of India.
Informal sources of credit: moneylenders, traders, employers, relatives and friends, whose activities no organisation supervises and who often charge very high interest.
Self-Help Group (SHG): a small group, usually of 15–20 rural women from one neighbourhood, who pool their savings and give small loans to members; after a year or two of regular saving the group becomes eligible for a bank loan without collateral.
“Exercises” — Full Solutions
All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter Exercises section. Answers are original, written in exam-ready style.
1. In situations with high risks, credit might create further problems for the borrower. Explain.
ANSWERWhether credit is useful or harmful depends on the risks in the situation and on whether there is some support in case of loss. When a borrower faces high risk, credit can push them deeper into difficulty instead of helping them.Take the example of Swapna, a small farmer who borrows from a moneylender to meet the cost of cultivation, hoping her harvest will repay the loan. When pests destroy her crop, she is unable to repay and the debt grows. To clear it, she has to sell a part of her land, ending up far worse off than before — a situation called a debt-trap.Thus, in high-risk activities such as crop production, if the expected income does not come (due to crop failure, falling prices or illness), the borrower still has to repay the loan with interest. The repayment burden can become larger than the income, forcing the borrower to take fresh loans or sell assets, so credit creates further problems rather than solving them.
2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
ANSWERIn a barter system goods are exchanged directly without money, so a transaction is possible only when both parties want exactly what the other has to offer — this is the double coincidence of wants. Money removes this difficulty by acting as a medium of exchange: a person can sell goods for money and then use that money to buy whatever they want, so the seller and buyer need not want each other’s goods at the same time.Example: Suppose a carpenter has made a wooden table and wants to buy rice. In a barter system he would have to search for a rice farmer who also happens to want a table at that very moment — a rare coincidence. With money, the carpenter simply sells the table to anyone who wants it, receives money, and then uses that money to buy rice from the farmer. The farmer accepts money happily because he can later spend it on whatever he needs. Money thus eliminates the need for a double coincidence of wants and makes exchange easy.
3. How do banks mediate between those who have surplus money and those who need money?
ANSWERBanks accept deposits from people who have surplus money and pay them interest. They keep only a small proportion of these deposits as cash (about 5 per cent in India) to meet the day-to-day withdrawal needs of depositors.The major portion of the deposits is used to extend loans to people who are in need of funds for various economic activities. In this way banks mediate between depositors (those with surplus funds) and borrowers (those who need funds).Banks charge a higher rate of interest on loans than the rate they pay on deposits. The difference between what is charged from borrowers and what is paid to depositors is the bank’s main source of income.
4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
ANSWEROn the top of a 10 rupee note is written “Reserve Bank of India”, and the note also carries the words “I promise to pay the bearer the sum of ten rupees” along with the signature of the Governor of the Reserve Bank of India.This statement means that the currency is authorised and guaranteed by the government through the RBI, which issues notes on behalf of the central government. The promise on the note assures the holder that the rupee is legally accepted as a medium of exchange.As per Indian law, no individual can legally refuse a payment made in rupees. Because the currency is authorised by the government, it is widely accepted by everyone as money, even though the paper note has no value of its own.
5. Why do we need to expand formal sources of credit in India?
ANSWERWe need to expand formal sources of credit in India for the following reasons:1. To reduce dependence on informal sources: the formal sector still meets only about half of the total credit needs of rural people; the rest comes from informal lenders. Expanding formal credit reduces this dependence.2. To lower the cost of borrowing: most informal lenders charge a much higher interest rate, so a larger part of the borrower’s earnings goes towards repayment, leaving little income and sometimes leading to a debt-trap. Formal credit is cheaper.3. To encourage development: cheap and affordable credit allows people to grow crops, do business and set up enterprises, leading to higher incomes. Cheap credit is crucial for the country’s development.4. To ensure fair distribution: at present it is richer households who mostly receive formal credit, while the poor depend on costly informal sources. Expanding formal credit and distributing it more equally helps the poor benefit from cheaper loans.
6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
ANSWERThe basic idea behind Self-Help Groups (SHGs) is to organise the rural poor, especially women, into small groups and pool their savings so that they can meet their credit needs without depending on moneylenders. A typical SHG has 15–20 members from one neighbourhood who meet and save regularly.Members can take small loans from the group itself at an interest rate lower than the moneylender’s. After a year or two of regular saving, the group becomes eligible for a loan from a bank. The loan is given in the name of the group to create self-employment opportunities for members.The key idea is to overcome the problem of lack of collateral. Since the whole group is responsible for repayment and any default is followed up seriously by members, banks are willing to lend to poor women even without collateral. SHGs thus provide timely, reasonable-cost credit, make women financially self-reliant, and offer a platform to discuss social issues like health, nutrition and domestic violence.
7. What are the reasons why the banks might not be willing to lend to certain borrowers?
ANSWERBanks may be unwilling to lend to certain borrowers for the following reasons:1. Absence of collateral: banks usually require collateral against loans. Borrowers such as poor households or small farmers often do not have assets to offer as a guarantee, which is one of the major reasons that prevents them from getting bank loans.2. Lack of proper documents: banks ask for documents such as employment records and salary slips before sanctioning a loan, which many poor or informal-sector borrowers cannot provide.3. Risk of non-repayment: if a borrower’s income is uncertain or the activity is risky (such as crop production prone to failure), the bank fears the loan may not be repaid, so it hesitates to lend.
8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
ANSWERWays in which the RBI supervises banks:1. The RBI ensures that banks maintain a minimum cash balance out of the deposits they receive, and it monitors whether they actually keep this balance.2. The RBI sees that banks give loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers.3. Banks have to periodically submit information to the RBI on how much they are lending, to whom, and at what interest rate.Why it is necessary: this supervision protects depositors’ money by ensuring banks can repay them, ensures that credit reaches all sections of society including the weaker ones, and keeps the banking system fair and transparent so that the economy functions smoothly.
9. Analyse the role of credit for development.
ANSWERCredit plays a crucial role in economic development because most economic activities — farming, manufacturing, trade and setting up enterprises — require money in advance, which is supplied through credit.Positive role: when used in low-risk, productive situations, credit helps people meet working-capital needs, complete production on time and increase their earnings. For example, Salim used credit to fulfil a large festival-season order, made a good profit and repaid the loan, becoming better off. Cheap and affordable credit enables people to grow crops, run businesses and create jobs, which drives development.Negative role: in high-risk situations or at very high interest rates, credit can leave the borrower worse off. Swapna’s crop failure made repayment impossible and trapped her in debt, forcing her to sell land. So credit pushes the borrower into difficulty when the risk is high and there is no support in case of loss.Conclusion: credit is essential for development, but it must be available at reasonable terms and from formal sources so that it raises incomes rather than creating debt-traps.
10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.
ANSWERManav will decide on the basis of the terms of credit offered by each source — the interest rate, collateral and documentation required, and the mode of repayment.Interest rate: banks charge a much lower interest rate than moneylenders, so a bank loan is cheaper. A moneylender may charge a very high rate, increasing Manav’s repayment burden.Collateral and documents: a bank will demand collateral and documents such as proof of income or employment records. If Manav can provide these, the bank loan is the better choice. If he has no collateral or cannot furnish documents, he may be forced to approach the moneylender, who lends without collateral but at a high cost.Ease and risk: Manav should weigh the convenience of getting the loan quickly against the cost. The wiser decision is to borrow from the bank if possible, because cheaper credit on easy terms leaves him more income and avoids the danger of a debt-trap.
11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.
(a) Why might banks be unwilling to lend to small farmers?
ANSWER (a)Banks may be unwilling to lend to small farmers because they usually lack collateral and proper documents to offer as a guarantee. Farming is also a high-risk activity — crops may fail due to pests, drought or floods, making loan repayment uncertain. With no security against the loan and a real risk of non-repayment, banks hesitate to lend to small farmers.
(b) What are the other sources from which the small farmers can borrow?
ANSWER (b)Small farmers can borrow from informal sources such as moneylenders, agricultural traders, large landowners (employers), relatives and friends. They can also borrow from cooperative societies (such as Krishak Cooperative), which provide cheaper credit, and may obtain loans through Self-Help Groups where they are members.
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
ANSWER (c)The terms of credit can be unfavourable when the interest rate is very high and the conditions are harsh. For example, in Sonpur, Shyamal, a small farmer, borrows from a trader at 3 per cent per month (36 per cent per annum), and the trader also forces him to promise to sell his crop only to the trader at a low price after harvest. Earlier he borrowed from the moneylender at 5 per cent per month (60 per cent per annum). Such high interest and binding conditions take away much of his earnings, leaving him worse off — these are clearly unfavourable terms of credit.
(d) Suggest some ways by which small farmers can get cheap credit.
ANSWER (d)Small farmers can get cheap credit if: (i) banks and cooperatives expand their lending in rural areas so that dependence on costly informal sources reduces; (ii) farmers form or join Self-Help Groups that pool savings and become eligible for collateral-free bank loans; (iii) cooperative societies are strengthened to provide loans for cultivation at low interest; and (iv) the government ensures that formal credit is distributed more equally so the poor too can avail cheaper loans.
12. Fill in the blanks:
(i) Majority of the credit needs of the _________________households are met from informal sources.
ANSWER (i)poor — Majority of the credit needs of the poor households are met from informal sources.
(ii) ___________________costs of borrowing increase the debt-burden.
ANSWER (ii)Higher — Higher costs of borrowing increase the debt-burden.
(iii) __________________ issues currency notes on behalf of the Central Government.
ANSWER (iii)Reserve Bank of India (RBI) — The Reserve Bank of India issues currency notes on behalf of the Central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on __________.
ANSWER (iv)deposits — Banks charge a higher interest rate on loans than what they offer on deposits.
(v) _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
ANSWER (v)Collateral — Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
13. Choose the most appropriate answer.
(i) In a SHG most of the decisions regarding savings and loan activities are taken by
ANSWER (i)(b) Members. In a Self-Help Group, most of the important decisions regarding the savings and loan activities — the purpose, amount, interest and repayment schedule of loans — are taken by the group members themselves.
(ii) Formal sources of credit does not include
(a) Banks. (b) Cooperatives. (c) Employers.
ANSWER (ii)(c) Employers. Formal sources of credit include banks and cooperatives, which are supervised by the RBI. Employers are informal lenders, so they are not a formal source of credit.
Extra Practice Questions
Short Answer Type Questions
Q1. What is meant by ‘medium of exchange’?
ANSWERMoney is called a medium of exchange because it acts as an intermediate step in transactions. A person first exchanges goods or services for money and then uses that money to buy whatever they want, so money makes buying and selling easy without direct barter.
Q2. What are demand deposits and why are they considered money?
ANSWERDemand deposits are the money people keep in bank accounts that can be withdrawn on demand. They are considered money because payments can be made against them directly by cheque without using cash, and like currency they are widely accepted as a means of payment.
Q3. What is demonetisation?
ANSWERDemonetisation is the act of declaring certain currency notes invalid. In India, in November 2016, notes of Rs 500 and Rs 1,000 were declared invalid and people were asked to surrender them to banks and receive new notes. It was done to reduce cash transactions and control corruption.
Q4. Why do lenders ask for collateral while lending?
ANSWERLenders ask for collateral as a guarantee against the loan. If the borrower fails to repay, the lender has the right to sell the collateral (such as land, building or deposits) to recover the money. Collateral reduces the lender’s risk.
Q5. State two differences between formal and informal sources of credit.
ANSWER(i) Formal sources (banks and cooperatives) are supervised by the Reserve Bank of India, while informal sources (moneylenders, traders, employers) have no supervisor. (ii) Formal sources charge a low and reasonable interest rate, whereas informal lenders usually charge a much higher rate, increasing the cost of borrowing.
Long Answer Type Questions
Q1. Compare the two credit situations of Salim and Swapna, and state what they teach us about credit.
ANSWERSalim, a shoe manufacturer, took credit from a leather supplier and a trader to meet the working-capital needs of a large festival-season order. He completed production on time, made a good profit, and repaid the loan — so credit had a positive role and left him better off. Swapna, a small farmer, borrowed from a moneylender for cultivation, but pests destroyed her crop. Unable to repay, her debt grew, and she had to sell part of her land — here credit had a negative role and trapped her in debt. The comparison teaches us that the usefulness of credit depends on the risks in the situation and on whether there is some support in case of loss. In low-risk, productive uses credit raises income, but in high-risk situations it can push the borrower into a debt-trap.
Q2. Explain the various sources of credit available in a rural area, using the example of Sonpur village.
ANSWERRural areas have a variety of credit arrangements. In Sonpur, Shyamal, a small farmer, borrowed from the village moneylender at 5 per cent per month and later from an agricultural trader at 3 per cent per month, who also made him promise to sell his crop only to the trader. Arun, a medium farmer with seven acres, was one of the few to get a bank loan at 8.5 per cent per annum, repayable in three years, and could even get a fresh loan against a cold-storage receipt. Rama, a landless agricultural labourer, depended on her employer (a landowner) who charged 5 per cent per month, repaid by working for him — keeping her in continuous debt. Besides these, cooperative societies like Krishak Cooperative provide cheap credit by pooling members’ deposits and borrowing from banks. Thus credit comes from both formal sources (banks, cooperatives) and informal sources (moneylenders, traders, employers), with very different terms for the rich and the poor.
Q3. “It is necessary that the formal credit is distributed more equally so that the poor can benefit.” Discuss.
ANSWERAt present, the formal sector meets only about half of the total credit needs of rural people, and it is mostly the richer households that receive cheap formal credit, while the poor depend on costly informal sources. Informal loans carry very high interest rates and do little to increase the borrower’s income; a large part of the earnings goes to repay the loan, and high rates can lead to a debt-trap, as with Rama in Sonpur. Therefore two steps are important: first, the total formal sector credit must increase so that dependence on expensive informal credit reduces; and second, this credit must reach the poor, not only the rich. If formal credit is distributed more equally, the poor can borrow cheaply to grow crops, do business and set up enterprises, raising their incomes. Both steps are essential for the country’s development.
MCQs & Assertion–Reason
1. Money is called a medium of exchange because it:
(a) is made of precious metal (b) acts as an intermediate step in the exchange process (c) is issued by banks (d) cannot be refused
For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.
A-R 1. Assertion: Demand deposits are considered money.
Reason: Payments can be made against demand deposits directly by cheque, and they are accepted widely as a means of payment.
A-R 2. Assertion: In a barter system, a double coincidence of wants is essential.
Reason: Money provides an intermediate step that removes the need for both parties to want each other’s goods at the same time.
A-R 3. Assertion: Banks earn their main income from the difference between interest charged on loans and interest paid on deposits.
Reason: Banks keep all of their deposits as cash with themselves.
A-R 4. Assertion: Banks are often unwilling to lend to the poor.
Reason: The poor usually lack collateral and proper documents required by banks.
A-R 5. Assertion: Self-Help Groups help poor women get loans even without collateral.
Reason: The whole group is responsible for repayment, and any default is followed up seriously by other members.
Answer key: 1-(A), 2-(B), 3-(C), 4-(A), 5-(A).
Exam Tips & Common Mistakes
How to score full marks in this chapter
Learn the exact definitions of medium of exchange, double coincidence of wants, demand deposits, collateral, terms of credit and debt-trap, and be ready to give your own example for money solving double coincidence of wants. For the credit chapter, always be able to contrast the two situations (Salim — positive; Swapna — debt-trap) and the formal vs informal sources, remembering that the RBI supervises only formal lenders. Use the textbook figures — banks holding about 5% of deposits as cash, SHGs of 15–20 members, and the ‘80 per cent small farmers’ statistic — to make your answers specific.
Common mistakes to avoid
Confusing currency with demand deposits — both are modern forms of money, but deposits are held in banks and used through cheques.
Forgetting that the RBI supervises only formal sources (banks, cooperatives), not informal lenders.
Listing employers, traders or moneylenders as formal sources — they are informal.
Saying credit is always good or always bad — its effect depends on the risk in the situation.
Mixing up collateral (the asset pledged) with interest (the charge on a loan).
Stating that banks keep all deposits as cash — they keep only a small share and lend out the rest.
Frequently Asked Questions
What is Chapter 3 of Class 10 Economics about?
Chapter 3, Money and Credit, explains why money is used as a medium of exchange, the modern forms of money (currency and demand deposits), how banks use deposits to give loans, the terms of credit, the difference between formal and informal sources of credit, and how Self-Help Groups help the poor borrow at reasonable rates.
What is the difference between formal and informal sources of credit?
Formal sources are banks and cooperatives, whose lending is supervised by the Reserve Bank of India and which charge low, reasonable interest. Informal sources include moneylenders, traders, employers, relatives and friends, who have no supervisor and usually charge much higher interest, increasing the cost of borrowing.
How many exercise questions are there in Class 10 Economics Chapter 3?
The end-of-chapter Exercises in Understanding Economic Development Chapter 3 contain 13 questions (including fill-in-the-blanks and multiple-choice parts), all reproduced verbatim and answered step by step on this page.
